# Ferrin: Taxation creates poverty

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Posted: Tuesday, October 30, 2012 12:49 pm

Eddie Electrician may provide eight hours of his time to Pete Plumber who, in return, provides eight hours of his time to Eddie Electrician. At the end of their workday, they have both received the services they needed. All services were provided as economically as possible and with no hidden costs, i.e., eight hours for eight hours.

If these hypothetical tradesmen had put a dollar rate on their time, say \$10 an hour, and if governmental taxes take half of that away, the economics of their transaction is “transformed.” Now, Eddie will have to work two hours (\$10 times 2 hours) to have enough “after-tax” money (\$10), to purchase one hour of Pete’s time; and, vice versa. Each worker will now have to work two days to earn enough after-tax dollars to pay for one day of the other’s time.

In 2010, a group studied the tax rate required to pay off the 2010 deficit; they concluded that the minimum rate would be 25 percent, while the highest bracket would go to 85 percent. Let’s see how that rate would work. Let’s assume our workmen still charge each other \$10 per hour. After each has worked eight hours for the other, each pays the other \$80; i.e., \$10 x 8 hours. The tax man takes 85 percent of the day’s pay, i.e., \$68, of the \$80 paid. The tax man then leaves each worker with just \$12 each for their daily take-home pay.

Now, each worker has to work almost seven days (\$12 x 7 = \$84) just to have enough to pay \$80 for one day of the other worker’s time. Now, you may not believe the tax rates will go to 85 percent. Maybe you will advocate to “tax the rich.” If you have been reading my guest columns, you will understand that taxing the “rich” just increases the cost of all goods and services; sorry, there really are no free lunches.

No wonder we need government subsidies. We have just seen the ratio between costs and prices go from 1:1, to 2:1 to 7:1. How can a nation prosper when government is such an enemy of progress and of wealth building? And, this progressive tax scam operates under the masquerade of helping the poor. Clearly, higher taxes create more poor and unemployed.

Are we supposed to be happy about our tax refunds?

As an analogy to a “tax refund,” and with a little artistic license, government might be seen as the “Grinch Who Stole Our Money.” Suppose you came home to find that all your possessions had been carried away by burglars. Should you rejoice if one of the thieves returns to give back one item; your toaster perhaps?

Now, you may think you have found a flaw in this analysis; you realize that the government spends tax dollars. So you might reason that the money government takes in taxes continues to be spent, and thus it stays in circulation. Unfortunately, spending and circulating dollars does not necessarily create wealth or private property. The more government taxes and spends, the more production shifts from what you would have bought with your money, to what government buys with your money.

So, what does government buy? Obviously, the federal government funds national defense, roads, courts, etc. (see Section 8 of the Constitution). Government also buys more government buildings and more bureaucrats. Government always seems to find ways to waste our money. That shift in government taxing and spending necessarily reduces the amount of private goods and services, forcing private consumption to decline. When production declines, people have less. That means you and I may not be able to feed our families. How far can you cut your personal consumption? Twenty percent? Thirty percent? More? So, when push comes to shove, who should eat? Those who work, or those who won’t work?

Let me illustrate how this works in a hypothetical small town. Suppose an isolated town of 100 workers produced all the food, fuel, materials, and labor to maintain their society. Along the way, 20 of the 100 workers decide that they should form a “government” to “regulate” all economic activity in the town. Now, only 80 of the original 100 workers will actually produce goods and services. The new government of 20 individuals will have to improve the productivity of the working group of 80 by 25 percent just to keep the level of production with the group of 100.

If those 20 government bureaucrats impose counter-productive regulations, wealth production could fall off even more. And the loss of wealth is directly related to the fact that government operations cost money to operate; and proportionately, the town will get little value in return.

You may also imagine what happens if some of the new governmental workers join a union. If the town members’ pay goes up, so will costs. What if the government mandates that all 80 of the workers have to join a union? Suppose the union demands more money? Where will that money come from? Who will pay the new costs for governmental and union growth? You will.

Every April we’re supposed to anxiously anticipate our tax refunds. My check always seems too small, (if I get one at all). It was my money in the first place; I earned it, and the government took it, used it, and paid no interest. Remember when George Bush cut us all a special one-time-only refund check? We were all expected to rush out in a frolicking frenzy to spend and celebrate our windfalls. Really, it felt more like just getting back our old toasters.

• Ahwatukee Foothills resident George R. Ferrin is a local attorney. For three years he was a civil structural engineer holding a Bachelor of Science in Civil Engineering from Arizona State University. For the last 30 years, he has practiced law as a commercial litigator focusing primarily on construction and engineering related cases.

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